Study Session 9: Equity Valuation: Valuation Concepts
I failed in Band 10. I am bit surprised with my Equity score which is <50%.
I want to know if retabulation of the scores manually would increase my chance of passing.
This is my scorecard. Could someone tell me if it is worth going for retabulation with my scores.
a theoretical question: in the fama-french three factor model, we get required rate of return on equity from the following equation:
R= Risk-free rate + b1 * market risk premium + b2 * small-cap return premium + b3 * value return premium. Here, b stands for factor beta.
I bring this question up in response to CFAI 2011 PM Mock #57. In the book, they talked about justified P/E alot and importantly, always specified trailing or leading P/E. In this question they ask for the intrinsic P/E and do not specify. In the explanation they use the same equation as for justified forward P/E. (1-b)/(r-g)
Does anyone know what the distinction is between justified and intrinsic or if we should assume forward P/E when it’s not specified?
Use DDM- Minority perspective
FCFF- cap structure instable, control perspective
According to Google “define ROE”:
“The mass of eggs contained in the ovaries of a female fish or shellfish, typically including the ovaries themselves…”
So my question is… which one of these is the correct definition?
A. ROE(2011) = Net Income(2011) / Book Value(2011)
B. ROE(2011) = Net Income(2011) / Book Value(2010)
C. Other: __________
Profitable company with earnings growing at 5% annually, pays a good dividend of $1.25 every year. Would you use DDM to value the stock or not? Why?
Nominal required rate of return 14%
Real required rate of return 8%
Present value of nominal cash flows discounted at 14%: Rs. 16.75 billion
Present value of real cash flows discounted at 14%: Rs. 12.25 billion
Present value of nominal cash flows discounted at 8%: Rs. 23.78 billion
The present value of the real cash flows discounted at 8% is closest to:
A. Rs. 14.06 billion.
B. Rs. 16.75 billion.
C. Rs. 23.78 billion
When calculating the Economic Profit, which is equal to NOPLAT(1-T) - $WACC, the dollar wacc is ammortized due to the depreciation from one year to another. Depreciation is a pure accounting procedure, which doesn’t really relate to the economic benefits or losses. I don’t really understand the concept, thus.
Can you shade some light on this?
Re: Question 91. How do they calc the expected change in the P/E? The formula for the Ibbotson model is
(1+expected Inflation)(1+Real earnings)(1+change in P/E) - 1 + div yield - RF
They come up with a change in P/E of .97??? The problem says the market is overvalued by 10% and they don’t really give the expected change in P/E.
OK, so I just realized the baseline valuation for this is 0 and will change depending on over/under valuation. But, I still don’t see where they come up with .97?
I’m just curious to know wether SGA is considered a cost in the ATOCF. I realize that one is a measure of cash flows while the other is a measure of profits. Still, I would think that SGA is a cost so that it should be included in both.
As I understand it, here are the equations for both measures:
ATOCF = (Sales - Costs - Depreciation)*(1-tax) + Depreciation
NOPAT = (Sales - Costs - SGA -Depreciation)*(1-tax)
Is there a reason why SGA is not in ATOCF?
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